The Belt & Road Initiative is the most ambitious development plan the world has seen since the Marshall Plan following World War II.
Between 2000 and 2016, more than 13,000 cross-border merger and acquisition transactions were completed in the 60 countries that make up the Belt & Road. The U.S. and Japan have long been active with outbound M&As in the region, and China is now taking on a larger role. Opportunities are abundant – particularly for sectors like finance, energy and telecommunications – but there are risks to mitigate.
These are just some of the many takeaways from a recently released report “Cross-Border M&A in the Belt and Road Regions” jointly issued by Thomson Reuters, Chinese Academy of Social Sciences IWEP, Tsinghua University Institute for Data Science and Tsingdata Institute.
We spoke to Thomson Reuters Managing Director, China Thomas Kim to learn more about M&A activity in the Belt and Road region and the implications for Chinese enterprises who are looking to invest there.
Let’s start with Belt & Road. What is it and how did it come about?
Thomas Kim: The Chinese government unveiled an ambitious development strategy called the Belt and Road Initiative (BRI) to promote economic cooperation across a stretch of 60 countries spanning from East Asia to Europe via South, Central Asia and the Middle East, retracing ancient trade routes from China to the West.
The “Road” refers specifically to the Silk Road Economic Belt, and includes countries that were along the path of the famed Silk Road. The “Belt” refers to the 21st Century Maritime Silk Road which traces trade routes along the sea from East to West.
Why is this region and initiative so important?
Kim: The Belt and Road countries currently account for one third of global gross domestic product. The Belt and Road Initiative is designed to help these countries contribute up to 80 percent of global GDP growth by 2050, by assisting economic cooperation, fostering investment in infrastructure and accelerating development. It is the most ambitious development plan the world has seen since the Marshall Plan following World War II.
Thomson Reuters (and partners) recently issued a joint report on cross border M&A in the Belt and Road regions along with an M&A strength index. What can you tell us about this project?
Kim: The generation of the index and report was driven by customer requirements on more intelligence to support their M&A activity across the Belt and Road regions, including the IB departments of major banks, corporate clients and government stakeholders. Partnering with Tsingua University’s Institute for Data Science and the Chinese Academy of Social Sciences, we produced this report based on Thomson Reuters financial data on cross-border mergers and acquisitions in countries along the Belt and Road from 2000 to 2016 and explored the role played by Chinese enterprises in these areas.
Is this the first report and index of its kind, and for whom is it most relevant?
Kim: Yes, it’s the first. When we released the report this summer, it generated a lot of interest in the media and spurred interesting conversations in both the public and private sector.
Given the scale and potential impact of the Belt and Road Initiative, the findings should be relevant to a wide range of different people – policy makers who want to promote economic development across these regions, investors who are looking for opportunities for growth, those who support project finance, all the different businesses and industries who could benefit from this scale of investment, and generally anyone who would be impacted by the economic, social and geopolitical impact of such a large, wide-ranging development plan.
What are some interesting trends you see coming out of the data?
Kim: First, the sheer size of deal activity and the pace at which it is growing is really striking. For example, the total deal value of China outbound acquisitions along Belt & Road countries this year to date has already reached US$33.3 billion, surpassing the total for all of 2016 (US$30.7 billion). The top target sectors YTD are Industrials (58.5 percent), Materials (21.9 percent) and Energy and Power (10.7 percentage), and top target nations include Singapore (58 percent), Mongolia (16.5 percent) and UAE (8 percent). In addition to revealing the scale of activity already underway, the report has sparked many conversations in the media and the business community around the need for Chinese enterprises to heighten their risk management programs.
Chinese acquisitions along Belt & Road countries reach record high in 2017
Headwinds unlikely to completely halt deal flow. Will the Belt & Road Initiative be a key driver for China’s deal activity?
What accounts for the pace of growth in Chinese outbound acquisitions and is it likely to continue?
Kim: Chinese enterprises are becoming larger, wealthier and more sophisticated. As the domestic Chinese economy continues to develop and shifts from a growth engine based on manufacturing and matures into an economy driven by services and technological innovation, Chinese investors look abroad for new markets and new opportunities for growth. While we have seen some slow-down in M&A activity this year due to capital controls, the overall growth trend will only continue to increase and accelerate over time.
Where does risk management come into play?
Kim: Risk management will be a challenge and an opportunity for Chinese enterprise involved in the Belt and Road Initiative. Having sophisticated risk management capabilities will allow Chinese enterprises to make wise investment decisions and to execute their growth plans successfully. On the flip side, not sufficiently addressing such risk can jeopardize any project. As an example, high speed rail projects in Indonesia and Thailand were recently stalled due to disagreements on financing and other factors.
How can Chinese enterprises mitigate the risks?
Kim: Country, currency, counterparty and supply chain risks need to be mitigated. In order to do so, Chinese enterprises need to develop relevant expertise, and invest in people, tools, software and content to improve risk controls as they expand into countries in which they have not previously operated and come with a myriad of challenges that need to be overcome and risks that need to be mitigated.
Information quality is important in researching Belt and Road M&A opportunities. How can businesses be sure of the accuracy and quality of the information they receive?
Kim: Certainly one of the challenges any firm faces in wanting to pursue M&A activity in Belt and Road regions is access to reliable information that puts them in a position to execute. This is particularly important when one is entering into a country or region in which one has not previously done business. It is therefore important for any enterprise who wishes to engage successfully to partner with firms such as Thomson Reuters, who have a proven track record in consistent breadth, depth and quality of content and tools that they can provide across all these regions. There is no other company that can match what we do, how well we do it and our track record in these countries. We look forward to helping our customers pursue and achieve their ambitious plans across the Belt and Road region.